Investment Policy

I am grateful for LivingaFI for prompting me to write down my own Investment Policy Statement (IPS). My IPS is below. I’ll set out the thinking behind it in more detail in separate blog posts (starting here).

Investment philosophy

  • Diversify. In as many ways as possible.
  • Minimise fees and taxes.  Tax-efficiency regarding the investment owner and account, not regarding the actual holding.
  • Have a strong preference for liquidity, and low fees. I.e. bias against structured notes, P/E funds, etc.
  • Presume that passive investments are usually better than active investments.
  • Monitor progress against a target allocation; incrementally invest to rebalance underweight components; buying is much better than selling.
  • Strive minimum complexity, notwithstanding the imperative to diversify.

Asset allocation

  • Diversified against geographies bearing in mind both estimated long term time allocation and the country’s share of global public markets.
  • Diversified against equities, fixed income, and cash. Bias towards equities and against cash.
  • Diversified across providers, both of accounts and of ETFs/funds.

Funds and accounts

  • Exploit Mrs FvL’s taxable allowances.
    • Maximise use of tax-free ISAs for both Mr FvL and Mrs FvL.
    • Moderate use of pensions for both Mr FvL and Mrs FvL, such that ideally one of us brushes the maximum asset cap and the other misses it by a bit.
  • Tax-free accounts to be the preferred accounts for holding both bonds and high-yield investments; taxable accounts are preferred for holding equities and low-yielding investments.
  • Partial use of offshore insurance bonds to provide flexibility, at the expense of fees
  • Financial advisers used only for complex planning or access to particular financial products, never for fund/stock selection.

Target allocation

Other considerations

  • Rebalance when there is surplus cash and circumstances are propitious. A drift from target allocation is too high if it is 2% of total funds or 20% of the ideal allocation, whichever is smaller (e.g. for USA fixed income: target 5%, acceptable range is +/-20% i.e. 4.0-6.0%; for USA equities: target 20%, range is +/- 2% i.e. 18-22%).
  • In principle, work to reduce the number of underlying holdings. Actual holdings should be split across multiple owners and accounts.

Change log.

  • Feb ’24: Another notch of tightening the leverage (from 20% to 18%). Reducing long Equity (Intl) and Fixed Income (UK) by 1% (which actually tilts me a tiny bit towards Equity, perhaps unwisely).
  • Nov ’23: Yet more dialing target leverage down (from 22% to 20%). Moving short cash from USD (-7% to -4%) to GBP (-11% to -12%) and USD fixed income down too (from 7% to 6%).
  • Aug ’23: Further dialing target leverage down (from 23% to 22%). Pulling USD fixed income (long) and cash (short) exposure down 1% each to suit.
  • May ’23: Updated to reduce target leverage (from 25% to 23%). The corresponding reduction in long exposure is from UK equities (down from 22% to 20%), slightly reducing the ongoing home bias.
  • Jan 22. Updated to remove preference for income and rising income. And to highlight the importance of avoiding complexity. And to get Mrs FvL’s name right!
  • Dec 21. Updated to reflect hike in leverage used to buy the Coastal Folly.
  • Mar 21. Since reducing my complexity, I now have fewer holdings that distribute cash in EUR. I’ve tilted the debt target by moving 1% from EUR to USD.
  • June 20. Slight reduction in UK equities exposure (23% to 20%), moved into Intl equities (19% to 20%), Intl Fixed Income (3% to 4%) and US Equities (45% to 46%).
  • July 19. Tiny reduction in leverage (from 13% to 12%), with a matching drop in UK equities exposure (from 24% to 23%).
  • April 19. Reducing the fixed income and leverage target slightly; Equity tweaked down to  93% but FI down from 22 to 20, and leverage down from -17 to -13.
  • July 2018.  Sale of two large assets has resulted in a change.  UK equities down from 33% to 25%. Cash/(loan) target down from -25% to -17%; EUR are currently cheapest to borrow (1.2%) and USD is becoming expensive (>3%) so my loan is now spread accordingly.  International equities up to 20%, Oz equities up to 5%. UK fixed income down to 9% and US fixed income down to 8%.
  • October 2017. Net margin down by 10%, all by a USD change; I am now targeting my net loan to be only 25% of my portfolio (down from 35%).  Equities and fixed income long positions reduced slightly (fixed income down more).
  • January 2017. U.K. Equity down weighted, U.K. Loan reduced, USA equity increased, USA loan reduced, USA and U.K. Fixed income reduced.  Broadly this reduces home bias in line with the November accidental / involuntary shift that occurred when I rationalised my private banking portfolio. It also reflected reduced leverage due to significant equity gains in 2016, coupled with the fact that one of my margin loan accounts is GBP-only. More details here.
  • July 2016. UK Fixed income downweighted, US loan target reduced; slight shift towards equity along with a slight reduction in leverage.
  • January 2016.  Major rethink, caused by the Dream Home purchase and the portfolio loan used to buy it.  Shift towards lower risk, less UK-facing mix; UK downweighted (in case of Brexit), fixed income upweighted (for stability). Geographic mix moved to: UK 40/USA 35/Intl 20/Aus 5, Equity 100, Fixed Income 50, Cash -50.
  • April 2015.  USA upweighted, UK downweighted (in frustration at paucity of attractive investments in UK).  Geographic split UK 55/USA 25/Intl 14/Aus 6.  Asset split 80/15/5.  Round numbers; fixed income jitters.
  • Early 2014.  Australia mildly upweighted (reasons forgotten).  Geographic split UK 60/USA 20/Intl 14/Aus 6.  Asset split 79/15/6.  Fixed income jitters.
  • Late 2012.  Original allocation.  Geographic split UK 60/US 20/Intl 15/Aus 5; asset split 77/19/4.

Any comments or suggestions very welcome.

21 thoughts on “Investment Policy”

  1. I’m surprised at your target allocation – nothing specifically for Japan, nor Europe, nor Asia Pacific, nor Emerging Markets. 86% in US, UK and Aus seems very concentrated to me, and goes against your Diversify as much as possible policy.

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    1. John – very useful challenge, thank you.
      You are right that having 86% of my portfolio in US/UK/Aus, compared to about the ~50% of world stock markets that they represent, is concentrated. However as I say I think my personal world, i.e. my friends, family, spending, cost of living, etc is closely connected to the economies of those three countries. I ask myself ‘how would I feel if country X trebled, relative to now?’. If country X is the UK, this affects me strongly; if the UK economy tripled, I would want a part of it. If country X is Chile (or Taiwan, or South Africa), this hardly affects me at all. If Chile triples, I won’t feel ‘left out’ and be struggling to maintain my lifestyle against the Chileans (who would doubtless be making their presence felt in the London property market, but that’s another story). So basically I am comfortable hitching my colours to the UK/US/Australia and running the risk that I might forgo some returns (and some diversification benefit) from the rest of the world. In the same vein, most of my 14% rest-of-world holdings are in Europe; if Europe tripled vs the UK this would have quite an impact on me and my r-of-w exposure needs to provide a hedge against that scenario.

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      1. That’s an Interesting perspective. Most of my ‘personal world’ is in the UK, and I also have a high weighting to this region. It seems inevitable… my house has to be here, my VCTs have to be here, my company share schemes have to be here and it was always easier to invest in UK equities and bonds than overseas assets, so together that means I’m 51% UK asset based. I have been trying to diversify across more regions ( I have about 3% of total assets in the USA and Australia isn’t even big enough to get it’s own catagory, so approximately 0-1% ) but without selling things ( incurring CGT, trading costs, having to make a decision ) it’s like change direction in an oil tanker.

        It’s also interesting that you are concerned about maintaining your relative position in the UK/US/Aus hierarchy, and are not so worried if the Chileans overtake Londoners with their standard of living, as long as you’re still one of the (and I’m assuming) better off British people. I had always gone with the idea that even at 30% UK assets will keep me in about the same relative position in the UK( as most people have little or no sale-able assets), and the larger growth from my emerging market assets might even push me further up the ladder ( although I am FI already, and I don’t have any social climbing ambitions )

        I also try to diversify across Larger and Smaller companies, and across Growth and Income strategies, which is another difference, but I have a preference for Active over Passive. I’m sure some people would say that I should swap everything for a Global Index tracker, but what sort of complex tracking spreadsheet could I build from that??

        Thank you for an interesting blog. It’s good to get new ideas to stimulate and challenge my existing thinking..

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  2. I’d also go with a more “buy the world” equity selection. If you want to increase home bias, that’s a personal choice (most people do this anyway but there are pros and cons).

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  3. Ciao FvL,

    Stalflare from Italy here… 🙂 I have found your blog roaming around similar sites that I check usually, first of all let me compliment on the reports and the efforts, it looks like your allocation/investment rules are doing well for you. I have one question though: no list of current holdings? Not even just the names?

    ciao ciao

    Stal

    Liked by 1 person

    1. Stalflare
      Thanks for your compliments. I’d love any suggestions/tips too please.
      I haven’t posted my full portfolio yet for a couple of reasons. The biggest reason is because I think it could reveal my identity which I do not want to do online. I am happy to cite specific holdings and have named about 30 o them, but overall I have over 200 positions and feel like that list is too big to be useful. I’m prepared to reconsider though: what would you use it for?

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      1. Ciao FvL,

        Wow 200 positions!! You must be a professional trader! I struggle to keep hold of my 50 stocks… I do understand your position very well, I struggled a lot with the idea of posting my holdings and the real-time results, in the end I went for a “formula” that doesn’t disclose all that much, although if one wants to add up some numbers is easy to find out the total holdings and net wealth. As to my identity I guess that if someone wants to find it they will have little difficulty in doing so.

        Going back to the PF, on the top of reading several articles, most of which are interesting, looking at PF allocation also gives me ideas on stocks that might be useful holding. Without the PFs I wouldn’t have invested in Carillion or Legal & General just to name two.

        Either than that portfolios are not very useful to me, fluctuations in price are negligible (in the long run).

        maybe you could post a top 10?

        ciao ciao

        Stal

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      2. Stal – Yes I agree with you I find other portfolios interesting for a similar reason. On my blog the Diary page (https://firevlondon.com/diary/) is designed to give you some suggestions that way. My top 10 holdings are mostly either The Firm(s) or ETFs; some of my best ideas are quite small positions. But right now the stocks I consider to be interesting include KMI, RDSB, BLT, and MMM.

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    1. Yes, I am leveraging via a margin loan. Hence my long positions add up to 125%. This would be like saying I am going to use my £1.0m to buy a £1.25m rental property with a £250k mortgage.

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  5. Hi, I really enjoy your writing, thanks! Have you covered why gold doesn’t form part of your target allocation anywhere? I would be interested in your point of view.

    Liked by 1 person

    1. David – thanks for the kind words!

      I take fairly similar view to Warren Buffett re gold – it produces no income and (thus) has no intrinsic value. I do accept however that it is globally traded/fairly liquid, has a low correlation with other asset classes, and can be worn! So I have some gold jewelry but that is my limit.

      You might enjoy this post which is tangentially on the same topic: https://firevlondon.com/2017/05/29/why-investing-beginners-should-consider-stock-markets/

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  6. FvL – I happened to stumble onto your blog – and I must say, it’s fantastic. I’m slowly working my way through it, and have already learnt a ton – huge thank you. Congrats on your new “free” house.

    I wanted to ask you about “Diversified across providers, both of accounts and of ETFs/funds” – do you mean don’t hold all your £ in one platform and in one ETF provider? I was thinking of consolidating in one platform to minimise fees – would you recommend against? Perhaps there is a level of £ at which this becomes relevant – would hugely appreciate your thoughts?

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    1. Welcome to the blog, and thanks for the kind words!
      I don’t hold all £ in one platform, and nor do I use just one ETF provider. I fear that even the strongest platforms could have a fraud attack or similar and just the uncertainty of whether any damage was caused could cripple them. Likewise so could Blackrock/iShares or Vanguard find itself in a big spot of bother. I think the fee saving of consolidating is too small to justify the risk of, effectively, a total wipeout.

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      1. That makes a ton of sense. I’m early in my journey, so (A) the fees are a meaningful chunk at this stage and (B) I’ve just gotten the hang of one platform – but I do plan to move to two platforms over time. I’m thinking iShares and Vanguard for ETFs, and HL and II as platforms – any watch outs with this combination?

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      2. Those 2 make sense to me. HL can be pricey if not used carefully. Both need care / cost a lot for foreign holdings which can include some London etfs.

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      3. Thanks a ton! Would you recommend any other platforms aside from HL / II? You mentioned IBKR – it does tend to be a bit too complicated for me!

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      4. for ‘friends/family’ with a lot less interest in finance than me, I think Fidelity does a good job. Good comms, OK products, good long term approach and OK value for money.

        As you note, I like IBKR but it is definitely a ‘pro-am’ approach and wouldn’t suit most!

        More generally the source of truth here is monevator’s broker comparison table. https://monevator.com/compare-uk-cheapest-online-brokers/ . It focuses on cheapness, which doesn’t help Fidelity et al., but has good coverage.

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  8. FvL I have been meaning to ask about your target asset allocation as I understand it you target 100% equities -20% cash and 20% fixed income. I assume this is long term portfolio. What is your rationale for this? The fixed income reduces volatility but the margin loan increases it – so why do both? What sort of duration and star rating do you go for with the fixed income. Apologies if you have been over this before.

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    1. Barn Owl – good Q.
      At some level my allocation argument has evolved incrementally. I want my holdings to be a blend of equity:fixed income (to smooth returns, among other things), albeit mostly equity. I also want a leveraged portfolio, to access funds without crystallising gains / selling during lows. QED I end up with 100:20:-20. There is an implicit ‘temporary’ nature to the loan, I suppose.

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